* (e): Estimate. (f): Forecast. *Fiscal year 2019 from July 2018 to June 2019.

STRENGTHS

Significant internal market, fuelled by dynamic demographics

Large transfers of expatriate workers

Cheap and abundant labour force

Perspective of the economic corridor with China

An important player in Islamic finance

WEAKNESSES

Tense geopolitical environment and domestic insecurity (terrorism)

Informality (40% of GDP) and low tax resources (15% of GDP)

Health, agricultural and educational deficiencies

Delayed development of Balochistan and of the countryside

Low sectoral diversification and energy dependence

40% of the workforce in agriculture; dependence on weather and world prices

RISK ASSESSMENT

The economy is expected to slow down...

Activity is set to lose much of its strength in 2019. Although the slowdown appears moderate, given the increase in population (2% per year), it is worse per capita of inhabitant. Household consumption (82% of GDP) will lose its economic momentum, but given its weight, will remain the main contributor to growth. The strength of expatriate remittances, which are benefiting from the favourable economic situation in the Gulf Cooperation Council countries (62% of the total) and the depreciation of the rupee, will be offset by the tightening of economic policy, particularly monetary policy (key rate increased from 5.75 to 7.5% between January and July 2018). The latter is aimed both at moderating demand and inflationary pressures resulting from the rise in energy prices and the depreciation of the rupee, as well as reducing pressures on the rupee. With their considerable weight in consumption, the deceleration of imports, which should result from the depreciation of the rupee and a further increase in customs duties, will work in the same direction. For the same reasons, investment (15% of GDP), already constrained by a poor business environment and infrastructure, is also expected to slow. This would also include investment in transport and electricity supply infrastructure through the Economic Corridor (CEPC) between Chinese Xinjiang and the port of Gwadar (southwest Pakistan). Services (58% of GDP) with trade, industry (19%), particularly mining, textiles, metallurgy, and agriculture (23% of GDP), with sugar cane, cotton, rice and wheat, will be affected by the lower availability of imported intermediate and consumer products.

... in order to reduce fiscal and external imbalances

Following the most recent agreement with the IMF at the end of 2016, the fiscal situation deteriorated. This is due to a less sustained increase in budgetary revenues due to the decline in household taxation, combined with an increase in expenditure before the 2018 parliamentary elections. With increased financing constraints, both domestic and external, the new government has planned to initiate a recovery. In September 2018, it raised the average gas price by 35% (which varies according to the sector), in order to bring it closer to the cost of the resource. Public debt – 70% domestic and denominated in local currency, despite increased recourse to external financing – has increased significantly and will continue to rely on the central bank and other banks, to the detriment of credit to private companies.

The current account deficit increased in 2017-2018 due to the widening trade deficit. It should decrease with the recovery of exports, in line with the devaluation of the rupee and better electricity supply, and with the deceleration of imports – if the price of oil does not slip. The trade deficit (10% of GDP in 2018) will remain the main contributor to the imbalance. It is explained by the low level of exports (8.5% of GDP), more than half of which are textile products (household linen, clothing, cotton yarn), with the rest being comprised of comprising agricultural products (sugar, rice) and some manufactured goods. Competition from neighbouring countries in textiles is exacerbated by the overvaluation of the real effective exchange rate, despite the fact that the central bank allowed the rupee to depreciate by 16% against the US dollar between January and July 2018. This is in addition to import pressure resulting from domestic demand exceeding growth potential. Remittances from expatriates (7% of GDP) partially offset the trade deficit. The remaining deficit, as well as that related to services and payments of dividends and interests, is financed by the increasing use of debt with China and Saudi Arabia (USD 6 billion loan in October 2018) and, secondarily, on the markets, as well as by a draw on reserves (which fell to 1.7 months of imports in June 2018). However, external debt, 80% of which is owed by the public sector, still represents only 30% of GDP, and is largely at concessional rates. FDI is minimal, with most of the investments in the CEPC being financed by Chinese loans. The new government plans to conclude a new financing agreement with the IMF and to associate Saudi Arabia with the CEPC in order to ease external accounts.

A democratic transition that does not end insecurity

Despite a campaign punctuated by terrorist acts led by the Taliban, the July 2018 parliamentary elections were the second democratic transition of power since 1947. With 116 deputies out of 270, the Pakistan Tehreek-e-insaf or Justice Party (PTI) became the leading political force, ahead of the Muslim League of Pakistan (PML-N, 64 seats) and the Popular Party (43 seats). With the support of members of small parties or independents, Prime Minister Imran Khan must rely on provinces (3 out of 4, including Punjab and Sindh) led by the opposition. The General Staff will keep control of foreign policy and security.

The rapprochement with India will remain difficult due to Kashmir. China will remain the main economic partner with the development of the Sino-Pakistan Economic Corridor (CPEC). The relationship with the United States, often stormy on Afghanistan and terrorism, will remain marked by military cooperation.